By Byron Kaye and Roushni Nair
(Reuters) -Australia's bank regulator on Friday raised the amount of spare cash that No. 3 lender ANZ must keep on hand due to suspected wide-ranging misconduct at its bond trading unit, the first financial fallout from the growing scandal.
The Australian Prudential Regulation Authority (APRA) had been due to review a A$500 million ($335 million) capital add-on it imposed on ANZ and other big lenders in 2019 during a crackdown on industry misconduct, but instead raised ANZ's requirement by A$250 million, citing risk culture concerns.
The regulator also told Australia's seventh-largest listed company to hire an external party to review the causes of problems at its bond trading division, in addition to investigations already underway by the bank and the securities regulator.
The APRA order is the first tangible impact on the bank since media reports in May said the bank's traders had misreported the value of a 2023 government bond trade. ANZ has since said it fired and suspended traders and launched a multi-pronged probe taking in market-related activities and staff behaviour.
"ANZ is financially sound with strong capital and liquidity levels, however weaknesses in managing non-financial risk can lead to detrimental financial impacts and APRA has no tolerance for such weaknesses persisting," APRA Chair John Lonsdale said in a statement.
The regulator had told ANZ's board and executive team it wanted the problem's underlying drivers addressed, and "depending on the outcomes from ANZ's independent review, APRA will consider whether further action is required", Lonsdale added.
ANZ said in a statement that it acknowledged APRA's concerns and was expediting work that was already underway to address the issues. The bank was working with the regulator on the scope of the independent review, it added.
ANZ shares were 2.3% lower in late trading on Friday, against a flat overall market and negligible changes in the other Big Four bank stocks, Commonwealth Bank, Westpac and National Australia Bank (OTC:NABZY).
Though ANZ, which recently closed a A$5 billion purchase of insurer Suncorp's bank, reported financial results this month in line with rivals, analysts said the APRA action set the course for a governance overhaul that may take years.
"The key risk we are concerned about is that ANZ will be required to provide an enforceable undertaking to APRA to remediate controls, risk culture, governance and accountability issues," E&P analyst Azib Khan said.
Rival Westpac had been distracted for four years by an APRA risk management intervention in 2020, and "we see risk of similar multi-year operational underperformance for ANZ", he added.
($1 = 1.4912 Australian dollars)